Unrecognised Value in the Uranium Market

While the future for uranium metal looks bright, the outlook for many of the stocks is less certain. To be blunt, most of today’s uranium issues are overhyped and overpriced, exposing investors to the ever-growing risk of a pullback in share prices.

This dichotomy – great commodity, so-so stocks – presents a significant investment challenge. Simply put, investors looking to profit from the outpouring of interest in yellowcake today must be far more creative than previously if they hope to uncover sub-sectors of the uranium space that haven’t already been overinflated by the hurricane wind of promotion. A tall order to be sure, but one that we at the Casey Energy Speculator have been digging deep on for several months.

Below, we discuss three areas where investors can still find value largely unrecognised by the lumpeninvestoriat – the kind of potential that can lead to double- and even triple-digit gains once those beyond the leading edge of the bell curve catch on and start piling in.

#1: Basement-hosted Deposits

Every uranium investor is probably already aware of the flooding problems at the Cigar Lake mine in northern Saskatchewan. The mine – which was slated to produce 16% of world mined uranium supply – was plunged into doubt in October 2006 after water began gushing into the underground workings.

The problem is that the Cigar Lake ore is hosted in sandstone – a rock type through which water flows easily, to the detriment of engineers. But not all deposits in Saskatchewan’s prolific Athabasca Basin are sandstone-hosted. Some uranium occurs in so-called “basement” rocks – more competent, drier layers beneath the sandstone. The problem is that many basement deposits are deep, which increases mining costs.

But it’s a lesser-known fact that more accessible basement ores are found outside of the Athabasca Basin proper. In these outlying areas, the sandstone that once covered the basement has been eroded, making deposits easier to get at. In fact, one of the Basin’s largest mines – Key Lake – was found in such a setting.

But while basement deposits are extremely prospective, they have been largely ignored by investors, who focus more on those companies working the thick of things in the middle of the Basin. The basement deposits have been ignored largely because most of the recent mines have been found underneath the sandstone and so exploration has tended to focus there. In addition, until recently, scientific understanding of basement deposits was also poor, but considerable advancements have been made over the past 20 years, since the last uranium cycle. Therein lies the opportunity. Many companies with prospective basement deposits have none of this upside factored into their share price, meaning we can take a low-cost ride on the potential of such plays.

#2: Low Grade Makes a Comeback

For years, low uranium prices meant that exploration companies searched mainly for high-grade ores – the type of deposits that all but guarantee a profit even during downturns in the market. But with prices rising, the industry is now realising that lower-grade deposits may be important sources of yellowcake. After all, such ores are very profitable with uranium at multi-year price highs.

In fact, one of the world’s largest uranium mines – Rossing, Namibia – works a bulk tonnage target at grades less than 0.1% U3O8. It’s no wonder that a number of companies are now quietly looking for the next Rossing.

Where might such a mega-deposit be found? The province of Quebec has long been known to host so-called pegmatite uranium deposits – similar to the geology of Rossing.

A few explorers have been catching our attention with potentially high-impact targets in this region. For example, Uracan Resources (CVE: URC) has assembled a prospective land package in southern Quebec, with trenching yielding results of 0.2% U3O8 over as much as 40 meters. The company will be drilling aggressively in 2007 to prove up a resource, which shows signs of being siseable.

And the coming year may see the discovery of a completely new Rossing-type deposit in northern Quebec. Quebec experts Azimut Exploration (CVE:AZM) along with partner Northwestern Mineral Ventures (CVE:NWT) spotted the potential in the area a few years ago, confirming their hypothesis through sampling in 2006 at the North Rae project which yielded assays of up to 0.5% U3O8 – ten times the average grade at the Rossing deposit. And like Rossing, the North Rae mineralised system appears to extend over several tens of kilometres, giving it potential for huge ore reserves.

The initial drill program on the target will be completed during the coming season, possibly representing a turning point and driving home to investors that Quebec has the potential to host a world-class deposit.
(We’ll be paying very close attention to the progress of the drill program in the pages of the Casey Energy Speculator).

#3: Go Where No Company Has Gone Before

The recent uranium boom has led the new crop of explorers to nearly every country on the planet. Wherever there are available yellowcake deposits, junior companies have lined up to stake land, swing scintillometers and Swiss-cheese the ground with drill holes.

The key word being available. While many nations are open to uranium exploration, there are several localities where authorities have been less inviting. Two of the most significant are India and Brazil. Both have known deposits of significant scale – in fact, Indian drills have cut high-grade uranium up to 10% U3O8.

And yet officials in these countries have not been granting exploration licenses. At least not yet. In recent conversations with Indian government officials, we’ve learned that the country may soon be opening up to exploration, with talks already underway with several companies already well positioned to lead the charge into India’s high-grade basins.

Another emerging district we are keeping an eye on is the African island of Madagascar. Although the nation’s geology is extremely prospective for uranium, the country was effectively closed to exploration for much of the past century due to an oppressive dictatorship. But with the changes in that country’s government over the last decade, we are starting to see permits being granted. Already a number of companies have accumulated significant land packages and we expect the news to start flowing sooner rather than later.

The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.

Go where sovereign risk may be high and choose companies with low grades….?? That’s a weird way of overcoming risk associated with U explorers….

Some might say this is exactly what you shouldn’t do.

I would say search companies with reasonable – high grades and in a jurisdiction with low sovereign risk. The opposite of what you have advocated. Goes to show how investors can always think differently.

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